My firm had in-house payroll for 30 years. I thought it was great. Pay period ends. The next day everyone had their paychecks by 10 AM.
What's not to like?
It wasn't until the last recession had us on the ropes, and, simultaneously, our accounting software provider wanted $12,000. They had a new program that was better (mostly for them) so they stopped supporting their old (our old) program. Their new program couldn't import their old program data. We decided to get a second opinion.
That gave us the reason to look around; when we did, we found out just how expensive that accounting program had been for all those years.
The Hidden Cost Of In-house Payroll
Payroll is a perfect example of why accounting programs are bad for you. Those paychecks that were produced in just two hours required another eight hours per month for filing reports with tax collecting bodies and moving money, making payments, and updating records.
So that's 12 hours per month - two payrolls at two hours each and eight hours follow up. Plus W-2s at year end.
The minimum that payroll was costing us was 12 hours x $15 = $180 per month. Or $2,160 per year - just for payroll.
Sometimes we even had a billable person performing accounting tasks so the damage was actually much worse.
The cost of a payroll service for our five employees (our average size) per month was $120, including W-2s at year-end. In our case, one extra billable hour per month paid for the payroll service. Nobody voted to keep doing payroll ourselves.
Here are the take-aways from my experience:
How Does a Payroll Service Work
The only compromise that we had to make was the timing of the receipt of payroll checks. We wanted to keep our pay periods ending on the 15th and the last day of the month. Because of the third party involved, paychecks couldn't be delivered just hours after the close of the pay period. I would recommend making paydays the 7th instead of the 1st, and the 21st instead of the 15th.
After the first month everyone should be able to adjust to the new payday schedule pretty easily.
My final recommendation is that you invest the time that you save by not doing payroll yourself. Invest the time in your marketing effort. An extra day or more per month will show some real dividends over time. See this post for some ideas on what to do with the extra marketing time.
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